Category: Interest Rates

It can be a scary thought to some people that interest rates
could be on the rise. We might see news reports predicting that rates will go
up soon or even hear statements form the Bank of England stating that they
predict they will be putting the rates up soon. This can be tricky for anyone
that is borrowing money.

Why are rate rises a problem?

If you are borrowing money then you will be paying interest on that loan. This interest is calculated by the lender and can be fixed or variable. If the interest is fixed it is always the same but if it is variable, they can change it. If the Bank of England increases the base rate then it is likely that lenders will pass that increase onto borrowers with variable rates and so they may go up as well. Although they do not have to do this, most of them will. They may even put your rate up by more than the base rate increase.

This means that an increase in interest rate could
potentially mean that you will be paying more out in interest each month. If
you have a lot of loans then this could mean that they will all be more
expensive. So, you could see your mortgage, personal loan, credit card and
overdraft all get more expensive. So, although a small rate increase may not
seem that much, if it is increased on each of your loans then it could make a
big difference. It will also make a bigger difference if you are borrowing a
lot of money compared with those that are borrowing less.

What to do about it

It is therefore really wise to be as well prepared as possible for a rate increase. Thankfully there are a number of things that you can do.

Firstly, you could start to overpay on your loans. This
means that you pay back more than you have to each month. This will reduce your
debt amount and mean that if rates go up, you will be paying interest on less
money and therefore it will not have such an impact. Try to repay the dearest
loans first so that you can save as much money as possible.

Not all loans will allow overpayment or they charge an early
redemption fee which is so expensive it is better not to over pay the loan. If
this is the case then it is good to try to put some money in a savings account.
Then if the rates go up, you will be able to fall back on this money if you do
not have enough to cover the repayments.

It can also be good to see if you can cut down your spending
elsewhere. Things like utility bills and insurance could potentially be
switched to cheaper companies and save you enough money to cover the increase
in interest. If you cannot or do not want to do this then you could spend less
elsewhere. Think about whether you could cut down on anything you are buying or
shop at cheaper retailers in order to save money. You may not want to change
what you are doing right away, but at least identify changes that you can make
and this will allow you to know what to do when the rate changes come in.

You could also think of ideas on how to make more money,
which again you could either start right away or leave until the rate changes
come in. It might be that you could sell things to bring in a lump sum that
could help you out for a while. You might be able to work a few more hours or
try to get a pay rise. You might be able to take on a second job or change to a
better paid job. You could rent out a room in your home or the garage and earn
some income that way. There are lots of options but you will need to find one
that suits you.

Having a plan should help to put your mind at rest. You will
know that if interest rates do go up, you will be able to cope with any
increases in costs that you will have to pay out. We cannot influence whether
the rates will go up or down, but by planning we can make sure that we will be
able to cope if they go up. Others would rather take action right away so that
they know they are prepared as soon as rates go up. We are all different in how
we might want to act as well as how many changes we will need to make in order
to make sure that we can cope. However, the solutions could be similar for some
of us and planning in advance is something that we will all benefit from.